Tesla deliveries disappoint in Q2
Tesla delivered 254,695 vehicles in the second quarter of 2022. That was way below the 282,291 forecast by Wall Street, which had already significantly scaled back their expectations to reflect a tough quarter for the company as it grappled with supply chain problems and Covid-19 disruption in China. That was down from the record 310,048 vehicles shifted in the first quarter.
The company said output has started to improve and that production in June hit a new all-time monthly record, reinforcing hopes that deliveries will rebound in the second half of the year.
That pushes the focus to July 20, when Tesla will release second quarter earnings.
How many cars will Tesla deliver in 2022?
Tesla is expected to swiftly recover from the severe disruption seen in the second quarter, with analysts forecasting deliveries to hit a new record of 385,873 vehicles in the third quarter before experiencing another jump to over 449,000 in the fourth.
(Source: Bloomberg consensus)
That suggests markets are confident that the problems that has plagued Tesla in recent months will ease in the second half. The hopeful outlook is underpinned by the fact Giga Shanghai is thought to have largely recovered output since lockdown ended. The anticipation there will be a rebound in deliveries in the second half is also partly driven by hopes that its new factories in Berlin and Texas will contribute to growth going forward, even if Tesla has struggled to get either one to produce significant volumes yet.
If Tesla can meet expectations going forward, then it is on course to hit its goal of delivering 1.4 million cars in 2022 – an impressive 52% higher than the 936,222 vehicles shifted in 2021. That would be slightly ahead of Tesla’s ambitious target to grow annual deliveries by 50% going forward.
Expectations remain high, but the hurdles that Tesla must overcome this year and beyond are significant. Let’s take a look at the key drivers of growth going forward and evaluate whether the selloff this year is justified or has opened the door to a rare opportunity to snap-up Tesla at an attractive entry point.
Giga Shanghai is key to growth in 2022 and beyond
Tesla’s Gigafactory in Shanghai has become a crucial part of the company since it started producing cars in 2019. Not only has it allowed Tesla to penetrate the huge potential within the Chinese market, but it has also become a hub for exports to other major markets including Europe.
The lockdown that started in March lasted for months and caused Tesla to shut down production and briefly halt all exports. Production has been recovering but there has still been a hangover from lockdown as its suppliers have a tougher time ramping back up. The latest reports suggest the factory is on course to hit a new record of 22,000 cars per week by the end of July, although that timeframe has been pushed back from its original target of mid-May.
However, it appears Tesla may be looking to take the opportunity of any lull in production after media reports suggested the company plans to temporarily shutdown the factory throughout July and the first week of August so it can upgrade production lines as part of an ambitious plan to more than double capacity at the plant to 1 million cars each year. The factory currently has the capacity to churn out around 450,000 cars per year. Details remain thin, but this has the potential to have a significant impact on delivery numbers in the third quarter of 2022. The ramp-up in China provides upside potential to current estimates, but the upgrade counters this on the downside, even if it will lead to longer-term gains.
China has been the driver of growth over the past two years and needs to get back on track, especially if Tesla continues to find it difficult to get its two new factories up and running. The decision to upgrade Giga Shanghai could suggest Tesla is hoping Giga Shanghai can pick up any slack from its new factories.
Tesla’s priority is to get Berlin and Texas up and running
The key task at the top of Tesla’s to-do list is to get its new Gigafactories operating at scale. The company opened a new factory in Berlin, Germany, back in March to mark its first site in Europe and that was swiftly followed by the launch of another plant being opened in Austin, Texas in April.
Both these sites are key to unlocking the next phase of growth at Tesla and could see overall capacity more than double from the existing level of just over 1 million cars per year (600,000 from Fremont and 450,000 from Shanghai, excluding any additional capacity to be added).
It has so far proven to be a tough task as the company struggles to secure the components and labour it needs. The fact neither site has its own battery facilities yet means these are having to be shipped from its original Fremont facility or from Shanghai, and congested ports and longer transit times are making this more difficult and more expensive.
There is little doubt that the improved scale offered by both new factories will help decrease production costs over the long-term, just like Giga Shanghai did, but the challenging environment and capital intensity of such huge projects means they are both bleeding money right now. CEO Elon Musk warned they have burnt through billions of dollars as Tesla struggles to increase output.
But Musk has been optimistic about both plants and said the problems will ‘get fixed real fast’, something it has demonstrated it can do in the past.
There have been media reports that Tesla is already looking for sites to open yet another factory – with the US, Canada and Mexico among those touted to be up for consideration – but this is highly unlikely to happen in the near future as Tesla must concentrate on fixing the problems at Austin and Berlin.
Notably, any lengthy delay here could lead to new models being pushed back further. The next new factory is expected to help facilitate the launch of new models, but it has also said that its primary goal is increasing output of its mass-adoption models. Tesla has already had to push back the launch of the long-awaited Cybertruck and the two other models in the pipeline, the Tesla Semi and the Tesla Roadster, are likely to have also been delayed as a result. This means that getting it right at Austin and Berlin is not only vital to Tesla’s goal to grow delivery numbers but also to its ability to unleash new models onto the market.
Is Tesla going bankrupt?
‘The past two years have been an absolute nightmare of supply chain interruptions, one thing after another,’ Musk said in an interview at the end of May. ‘We're not out of it yet. That's overwhelmingly our concern is how do we keep the factories operating so we can pay people and not go bankrupt.’
Just the mention of the ‘B’ word can be enough to spook markets, and the fact Tesla has started making job cuts has only added fuel to the fire. Still, whilst this has provided another headwind to add pressure on the share price, it has largely been seen as hyperbole by the markets. Musk has long criticised rival start-ups and warned the likes of Rivian and Lucid will go broke without major changes, and that most traditional automakers are also at risk as they make the costly transition to cleaner modes of transport.
That warning comes at a time when Tesla is going through a capital-intensive period. Building two new factories in two different countries simultaneously is not cheap. Plus, Tesla is also having to invest serious sums to develop its own battery cells after finding supplies from its two existing partners – Panasonic and Amerprex Technology – became scarcer and more expensive as supply constraint for key metals like lithium, nickel and cobalt start to bite and costs soar. The goal once again is to improve the batteries and bring down the cost over the long-term, but this is another costly endeavour for now.
Tesla had some $18 billion in cash and equivalents and long-term debt of around $3.2 billion at the end of March, with further untapped debt facilities it can use if needed. The company has said it plans to spend $5 billion to $7 billion in capital expenditure each year in 2022, 2023 and 2024, implying its budget for the next two years can be covered by existing cash balances. Tesla will have the ability to adjust the rate of spend if it needs to, although it does have some firm commitments in place that means it must spend at least RMB14 billion (roughly $2.1 billion) in Shanghai by the end of 2023 and another $5 billion in New York by the end of 2029.
Tesla has, so far, continued to generate enough cash to sustain itself despite the enormous challenges it faces, and has said it believes it can continue to be self-funding ‘as long as macroeconomic factors support current trends in our sales’. In other words, as long as demand continues to hold up and outstrip supply, cashflow shouldn’t be a problem.
There is little doubt that long-term demand for electric vehicles remains robust and that adoption will continue to accelerate this decade, but there are some concerns that demand could suffer over the shorter-term should we fall into a recession and see any pullback in consumer spending in 2022 or 2023. The automotive industry is cyclical and sensitive to the wider economy, and the outlook has continued to deteriorate as inflation continues to run rampant. Evidence suggests Tesla continues to receive orders faster than it can fulfil them, suggesting it has headroom to play with even if there is a drop in demand. The extent of any fall will largely depend on how long and severe any downturn is.
So, how real of a threat is bankruptcy to Tesla? Low, but not impossible. Markets remain confident that Tesla can keep powering ahead and Wall Street remains bullish that Tesla can remain profitable, even if earnings take a temporary hit.
One critic of Tesla has been Gordon Johnson from GLJ Research, which has warned that ‘bankruptcy is a real risk’ for the company because a large chunk of its funds are locked-up in China, where money cannot be repatriated out of the country, posing ‘a real problem’ for the stock. Tesla said $6.8 billion of its cash balance was held in foreign currencies at the end of March, but it is not clear how much of this is in Chinese yuan as it also includes balances in other currencies including euros and the Canadian dollar.
While Tesla has not suggested it will need fresh funding anytime soon, it has not ruled it out and has said it will consider raising funds or fresh debt if it needs to keep its growth ambitions alive.
Has the selloff in Tesla stock been overdone?
Valuations of electric vehicle stocks range wildly due to the fact they are all at different stages. Pure plays have earned sizeable premiums to their valuations as markets assign more value to their growth prospects and overlook the fact most of them are still burning through cash and deep in the red. Meanwhile, traditional automakers have failed to boost their valuations by shifting to electric vehicles despite generating cash and profits today.
One of the biggest threats facing Tesla over the coming years is increasing competition, as more domestic rivals launch alternatives in the US and foreign competitors in China start to expand into Europe. Meanwhile, the chief financial officer Volkswagen, which already boasts one of the best-selling electric vehicles on the market, recently said that he expects the German carmaker to overtake Tesla by 2025. Although Tesla also believes most legacy automakers are also on course to hit financial trouble, it has conceded that many of them have ‘greater or better-established resources’ that could pose a risk to Tesla in the future and cause its market-leading position to weaken.
Tesla is somewhat unique in the fact it is the only pure play electric vehicle stock that is profitable. That makes it difficult to compare valuations to loss-making rivals like Rivian and Lucid. But in terms of annual sales forecasts for 2022, Tesla trades at a ratio of 8.3x compared to loftier ratios of 13.4x at Rivian and 21.3x at Lucid.
While that is favourable, Tesla’s price-to-sales ratio is markedly higher than its Chinese rivals, with Li Auto at a multiple of 5.4x, XPeng at 4.5x and NIO at 4.0x. The fact traditional automakers Ford and General Motors both earn around $150 billion in annual revenue and have market caps closer to $45 billion (giving them both a ratio of 0.3x) demonstrates the disjointed valuations that are on the market.
In terms of earnings, Tesla can only currently be compared to profitable traditional automakers. Tesla currently trades at a price-to-earnings ratio of 58.6x based on forecasts for adjusted EPS in 2022, while Ford trades at 5.9x and General Motors at 4.7x.
Those ratios suggest Tesla’s valuation is at a stretch today but, again, most of it is being assigned to the rapid growth it aims to deliver over the coming years. With this in mind, Wall Street remains bullish on Tesla’s prospects and sees over 30% potential upside over the next 12 months, with an average target price of $894.50, suggesting the selloff this year has been overdone but rightly down from the peaks of over $1,200 seen back in November 2021.
Where next for Tesla stock?
Tesla shares have plunged over 40% since entering a downtrend back in April. In fact, Tesla shares have suffered their biggest quarterly decline on record in the three months to the end of June. The downtrend remains firmly in play today despite signs that the stock found a floor at $623 in late May, supported by the fact this pushed the stock into oversold territory and encouraged buyers back into the market.
This floor is still in play and must hold to avoid opening the door to a steeper drop toward the $570 mark, which was last hit over one-year ago. Any slip below here will see shares fall below the $550 mark.
On the upside, Tesla shares need to break back above the $700 mark if it is to break out of the current downtrend, but it could be a swift recovery should this happen as it allows the June-high of $775 to come onto the radar, roughly in-line with the 50-day moving average, and then to the 100-day moving average at $848 and then the 200-day average at $911. From there, Tesla shares can target the $950 level of resistance seen last February.
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